Watch for ID theft on your taxes

When traveling cyber space it is impossible not to leave a trail of breadcrumbs along the way, and if you are not careful you might just leave your pin codes, social security number and passwords out there as well.

Identity thieves used to be content with getting their jolly's off of ordering a couple of $500 pairs of shoes and a new TV and charging it to your credit card, or cleaning out your brokerage account, but it seems that got old and many have moved onto more sophisticated undertakings involving using social security numbers to commit tax fraud.

The IRS received nearly 450,000 complaints of tax identity theft last year, and it's not slowing down. Tax ID theft can take several forms. One trick is the thief will file a tax return claiming they are owed a hefty refund, and the IRS will promptly send them a check and it will suddenly be deposited in an off shore account that cannot be traced. When the tax payer files his taxes and claims a legitimate refund the IRS either refuses to pay the refund, or if they do pay it can come back later and demand the overpayment made to the scammer back immediately, causing no end of stress for the legitimate tax payer.

There have been cases I am told of paychecks being seized and accounts frozen over disputes like this and it can take years for the taxpayer to prove he is the victim.

Another form of tax ID theft is if someone who may not have a social security number (or doesn't want to pay taxes) gives his employer a phony one that does belong to someone but claims a large number of exemptions so there is little if any withholding.

His employer then files the W-2 with the fake tax ID number on it and that income is credited to that social security number as taxable income. When the IRS finally gets around to reconciling what income was reported on the tax return vs. what income was filed in the social security number the legitimate taxpayer will get the bill for tax on income he did not ever receive. Even worse is initially the collection letters may go to the scammers PO Box that is untraceable and the real tax payer has no way of knowing he is under investigation until the IRS starts seizing assets. Again, proving you are a victim can be a harrowing process.

The worst part of this is that it can take years for the IRS to reconcile what is reported vs. what is not and that means the difference in tax owed could be tens of thousands of dollars, or more and be doubled or tripled with penalties.

For years people have been told to check their credit reports to watch for signs of ID theft, but now it is becoming apparent that is not really enough. The IRS now recommends that taxpayers periodically submit a 4506-t form, requesting a transcript of their tax account activity. This will show, amongst other things, all taxable activity associated with a given social security number. It will detail income reported, taxes paid, returns filed and the like. If there is income reported or refunds paid that you don't know anything about, you need to take immediate action.

To complete this process go to the irs.gov and find form 4506-T (not 4506, there is a difference). You can complete the form and select the tax years you want to check out and be sure to check the box that says "account transcript". This is important because if you check the box "return transcript' you will only get the info you probably already know about that you put on your return. The account transcript will be far more detail and show if there are any unknown activities on your social security number. This process can take about 2-6 weeks.

Now, back to the point of my story, if you have been a victim of identity theft on your credit report, your mortgage lender will pick it up when we run your credit. I've had to deliver the bad news to more than one loan applicant that their credit was trashed and watch the painful process they go through cleaning it up.

When we check that your tax returns you gave us match what was filed we only check for that, we do not check your tax transcript which is where all of this would likely show up. But if a tax levy or lien suddenly show up during the application process it is up to the client to sort it out with the IRS and legitimate or not, the loan approval process will be halted until the matter is resolved.